Sen. Tom Coburn, R-Okla, is making a push for prompt action on a long-term NFIP reauthorization, and he has the support of Senate Majority Leader Harry Reid, D-Nev. Coburn is said to be fed up with short-term extensions based on empty promises of a future Senate vote.

The last obstacle to reauthorization is a demand by Sens. Thad Cochran, R-Miss., and Mark Pryor, D-Ark., to have Sec. 107 removed from the Senate bill, which would expand coverage requirements to “areas of residual risk” located behind levees, or near dams or other flood-control structures.

You read that right. If Senators Thad Cochran and Mark Pryor have their way, the reauthorized National Flood Insurance Program will not provide coverage for areas located behind levees, dams, or other flood-control structures. What’s Senator Cochran’s reason for trying to remove coverage for these areas? The flood-control systems in place are so good, that no insurance is needed. Seriously.

National Underwriter reports that:

[Senator] Cochran [said] Sec. 107 creates new flood-insurance coverage mandates on families and businesses that are already protected by strong levees and dams. "The blanket approach taken in the current bill should be changed in order to ensure fair treatment for those protected properties," [Senator] Cochran [said].

This approach is misguided. Matt Gannon, the assistant vice president for federal affairs at the National Association of Mutual Insurance Companies makes this point succinctly. “There are 30,000 miles of levees in the U.S. and they fail all the time. The current NFIP debt is actually as high as it is because of failed levees in New Orleans in 2005.” Gannon added, “I know that Arkansas has invested heavily in their levee system along the Mississippi, [b]ut to claim the levees will never fail, we think, gives people a false sense of security. It calls to mind the ‘unsinkable’ Titanic and the designer’s intentional shortage of lifeboats.”

Mr. Gannon is absolutely right, and if you own a property near a flood-control structure such as a levee or a dam, you should be very concerned about what Senators Cochran and Pryor are proposing. Feel free to voice your opinion directly with these Senators. You can find Senator Cochran’s contact information here and Senator Pryor’s contact information here.

Mr. Alvarado’s property was damaged by Hurricane Ike in 2008 while the “forced-placed” policy was in effect. Lexington made an insurance payment for the damage to Flagstar, and Mr. Alvarado was never given any of those proceeds to repair the property. Mr. Alvarado then attempted to recover insurance proceeds to repair his home, but Lexington told him that because he was not listed as an insured under the forced-placed policy, he had no rights under the policy and they would not be issuing any payment to him. Mr. Alvardo then sued Lexington under a third-party beneficiary theory. The trial court granted summary judgment in favor of Lexington, and Mr. Alvarado appealed.

On April 19, 2012, the Texas Court of Appeals rendered its decision. The Court noted that,

Although Texas state courts have addressed whether a party may be a third-party beneficiary in the general insurance policy context, they have not addressed the specific issue of whether a homeowner-borrower qualifies as a third-party beneficiary under a force-placed insurance policy entered into between the insurance company and the mortgage company.

Because there was no guidance at the state court level, the Texas Court of Appeals turned to federal case law for guidance.

The federal courts applying state law, like Texas courts, have looked to the language of the policy to determine whether any of the provisions clearly confer a benefit upon the borrower.

The Court noted two examples where the Fifth Circuit found third-party beneficiary status: (1) when the policy, although only listing the mortgage company as a named-insured, contains subrogation clause providing that the homeowner-borrower will not be liable to the insurance company for any loss paid to the insured; and (2) when the policy contains a provision allowing for temporary housing expenses to be paid to the homeowner-borrower.

Primarily, the federal district courts have focused on whether the policy contains one of two specific clauses that may benefit the borrower: an ‘excess loss’ or ‘residual payment’ clause or (2) a clause providing that the insurer will adjust all personal property losses with, and pay any such proceeds to, the borrower.

The Court concluded that this question is very fact-specific. The Court of Appeals, by a split 2-1 decision, ruled that the specific set of facts in Alvarado did not merit summary judgment for Lexington, and reversed the lower court’s decision.

Claims handling. Below is a summary of the significant revisions found in your policy.

• Claims filing deadline. You are required to file a claim with us no later than one year after the date that your property is damaged. If you show good cause, the commissioner of insurance may extend this deadline up to 180 days.

• Additional information related to your claim. Within 30 days of the date you file your claim, we may request any information necessary to determine whether to accept or reject your claim.

• Timeframe for us to accept or deny your claim. We must provide you a written notice of the amount we will pay, if any, and notice that we have accepted or denied your claim in full or in part within 60 days of receiving your claim or within 60 days of our receipt of the information we requested within the 30-day period above whichever is later. If we accept all or part of your claim, we must tell you how much we will pay for your loss at that time.

• Access to information. If we deny a portion of your claim, we must give you a detailed summary of how we determined not to accept coverage. If we accept your claim, you may request a detailed summary of how we determined the amount we will pay.

• Claims payment deadline. We must pay your claim within 10 days of the date we notify you that we accept all or part of your claim. If payment depends upon your performance of specific actions, we have 10 days from the day you complete those actions to pay the claim.

• Loss settlement. We may use guidelines published by the commissioner of insurance to determine the extent that your loss is caused by covered wind damage or excluded flood damage (including waves or tidal surge).

Limited Judicial Remedies. The law limits a judge’s ability to review our claims decisions. These limitations are described in detail under Condition 10 of your policy.

• Disputes Concerning the Amount of Loss. All disputes concerning the amount we will pay on a covered loss must be resolved through appraisal. Condition 11 of your policy provides complete details of your rights and duties when disputing our determination of the amount we will pay for an accepted claim.

• Appraisal is your exclusive remedy. You are prohibited from suing us over the amount of loss if we have accepted coverage for any part of your claim.

• Appraisal is binding. The appraisal decision is binding and cannot be reviewed or appealed, except for specific reasons outlined under Condition 11.g of your policy.

• Time limit to demand appraisal. You have 60 days after the date you receive written notice that we accepted all or part of your claim to demand appraisal. We can grant a 30-day extension for good cause if you request the extension in writing no later than 75 days after you receive the notice from us. If you do not demand appraisal within the 60 days, or within 30 days after we grant an extension, you waive your right to demand appraisal.

Disputes Concerning Denied Coverage. Prior to filing suit, we may require that a dispute over our denial of coverage for your claim in full or in part be handled by alternative dispute resolution (ADR). Condition 12 of your policy provides complete details of your rights and duties when disputing a denial of coverage.

• Notice of intent to file suit against us. Prior to filing a suit concerning your denied claim in full or in part, you must notify us of your intent to file suit.

• Time limit to file suit. You must notify us of your intent to file suit within two years of the date you receive our written notice that we denied your claim in full or in part. If you do not provide timely notice of your intent to file suit, you waive your right to contest our denial and you are barred from suing us concerning that particular denial.

• Timeframe for ADR. We must request that a dispute be handled through ADR within 60 days of the date you provide us notice of intent to file suit. ADR must be completed within 60 days of our request, unless the period is extended by either your and our mutual consent or by rule adopted by the commissioner of insurance. If we do not request ADR within 60 days of receipt of your notice of intent, you can proceed with your suit. If we waive the ADR requirement in writing, you can proceed with your suit.

• If we request ADR, you can still file suit against us. If we request ADR, you may file suit against us if the ADR was not completed within 60 days of our request, the ADR was not completed within an authorized extension of the 60-day period, or you are not satisfied after the completion of the ADR.

• Limitations on recovery. You may only bring a suit against us over our denial of your claim to determine if our denial was proper and to determine the amount you are entitled to recover. You may only recover the amount payable under the terms of the policy, consequential damages under common law, prejudgment interest, court costs, and reasonable and necessary attorney’s fees.

• Double damages may be awarded. You may recover damages in an amount not to exceed two times the damages if you show by clear and convincing evidence that you were harmed because we mishandled your claim by intentionally committing certain acts. These acts are described in detail under Condition 12.e.(8)(iii) of your policy.

In future posts I will discuss some of these changes in greater detail. Specifically, I’ll elaborate on how these changes might affect your claims process experience.

Allstate spokesperson Beaman said that the rate changes were driven by loss costs, which she claimed were rising faster than premiums.

I find Beaman’s comments particularly interesting after reading PR Newswire’s article titled “Allstate Reports Strong Fourth Quarter 2011 Earnings and Continued Progress on Strategic Commitments to Improve Shareholder Value.” I found the following quotation particularly fascinating. “Operating income increased to $750 million, a $479 million increase from prior year [sic] due to substantially lower catastrophe losses,” said Thomas J. Wilson—chairman, president, and chief executive officer of The Allstate Corporation.

You read that right: Allstate had net operating income of $750 million for the months of October, November, and December 2011. And if you think I’m being selective with the numbers by using operating income instead of net income, Allstate also reported net income of $724 million for the last three months of 2011. That means that during the fourth quarter of 2011, Allstate made on average $327,898 an hour and $5,464 per minute in pure profit.

And to top if all off, the guy in charge of Allstate, Mr. Thomas J. Wilson, boasted to Allstate’s shareholders that the increase stemmed from “lower catastrophe losses.” So, on the one hand you have Allstate spokeperson Beaman implying to Texas policyholders that Allstate is hurting for cash, while Allstate’s top guy tells shareholders something entirely different. Something isn’t adding up here . . . .

And last, but certainly not least, PR Newswire noted that during the 2011 fourth quarter “rate increases averaging 7.8% in 17 states were approved as Allstate continued its initiatives to improve homeowners [property insurance division] profitability.” [emphasis added]

Because the policy did not define “vacant” or “vacancy”, the appellate court turned to the case law for a definition. “The term vacant has been defined by case law as an entire abandonment, deprived of contents, empty, that is, without contents of substantial utility.” (internal citations and quotations omitted). In addition to the evidence discussed above, the appellate court also considered the following evidence: the fact that no one lived in the dwelling; the insurer’s adjuster’s photos of the dwelling after the fire showing no contents inside the dwelling; and the remodeler’s proposal that the work would be completed by July 12, 2006.

Viewing all of the summary judgment evidence in the light most favorable to Columbia Lloyds, the nonmovant on the [insured’s] traditional motion for summary judgment on their breach of contract claim that was granted, a genuine issue of material fact exists concerning whether the dwelling was not vacant for sixty consecutive days prior to the fire. Based on [the facts] … a reasonable and fair-minded person could conclude that the dwelling was … without contents of substantial utility for more than sixty days prior to the October 28, 2006 fire. [internal citation omitted]

The Court held that “reasonable and fair-minded people could differ in their conclusions on whether the dwelling was not vacant for sixty consecutive days prior to the fire,” so that summary judgment was not proper.

Was this a correct interpretation of the Texas Prompt Payment statute, that it does not apply when an insurer eventually pays, even if the claim was initially denied?

Fortunately, the Court in Encompass disagreed with the insurer’s argument. “A wrongful rejection of a claim may be considered a delay in payment for purposes of [§ 542.058].’ Encompass, 775 F.Supp. at 965. In support of its position, the Court cited the Texas case of United Services Auto. Ass’n v. Croft, 175 S.W.3d 457, 474 (Tex.App.—Dallas 2005, no pet.). In United Services Auto, the court held that that “[w]hen an insurance company denies a claim, it runs the risk that its decision may be wrong and subject it to liability [for failure to promptly pay]”. The Court in Encompass ultimately concluded that “Encompass ha[d] sufficiently alleged that its claims were wrongfully rejected” and denied the insurer’s motion to dismiss the insured’s Prompt Payment claim.

Inherent in every insurer’s determination to deny a claim is the possibility that the insurer was wrong. What that means is every time an insurer denies a claim, “it runs the risk that its decision may be wrong,” which would potentially subject it to Texas Prompt Payment statute. However, this only applies if it is later determined that the insurer was wrong to deny a claim. If the insurer is found to have been correct in denying a claim, the prompt payment penalty will not apply.

The USDA crop production summary for 2011 showed that only 57% of the 21.2 million acres of crops planted in Texas were harvested. In comparison, almost 87% of the plant acreage was harvested in 2010.

Officials emphasized the importance of crop insurance as a buffer to help farmers through losses from droughts, floods and other natural disasters. As mentioned last week, a government subsidy keeps rates low for farmers, but it’s up to the farmers to ultimately decide the amount of coverage they want. Mark Lamon, who grows wheat, corn and sunflowers in Medina County, Texas said “[crop insurance] does provide an effective safety net.”

To put things a little more in perspective, Texas’ $2.5 billion in indemnity payments from 2011 is tops in the country, beating second-place North Dakota by about $1 billion. Pack states that this is also Texas’ highest total since 1989, the year record-keeping began.

To all the farmers out there in need of assistance with their drought-related insurance claims, my advice is this: Don’t wait too long before consulting a professional who is well-versed in insurance matters. Otherwise, you might find yourself struggling to recover for the losses you suffered last year.

Their insurance is funded in part by tax revenues, an average of 60% of the insurance premiums, costing taxpayers about $10 billion a year. The article points out that “among federal agricultural expenses, ‘it’s become the biggest single budget item at the moment.’” Some claim that if taxpayers didn’t subsidize crop insurance, many farmers would not purchase it, and farmers would again rely on disaster programs.

Rob Heyen, of Crop Insurance Solutions, stated that “any stable government needs a stable, consistent and reliably inexpensive food supply.”

If you’re a farmer without insurance, I strongly advise you to evaluate your risks and determine whether you can afford crop insurance. It’s always great to hedge your bets against the unknown, especially in an industry where a short run of bad luck can ruin your entire business.

Kitzman said that, “TWIA was supposed to be the market of last resort for the 14 coastal counties that comprise Tier 1, but that is not the case anymore.” Kitzman continued:

With no other significant source of funding to pay claims, this growth in exposure is an excessive burden on coastal citizens. Additionally, it is not reasonable to expect that any single organization can effectively manage the explosive growth in claims activity that occurs after a significant tropical storm. On July 1, 2008, TWIA had 247 open claims; 90 days and two storms later, it had over 65,000 claims and was simply overwhelmed.

The article notes that according to a November 2011 response to a public information request, TWIA admitted it faces a maximum loss outcome of $14.7 billion and probable maximum loss of $5.3 billion if a Category 4 hurricane strike Corpus Christi, and a probable maximum loss of $6.4 billion and maximum loss outcome of $14.5 billion for a similar storm striking Galveston. TWIA’s total insurance liability, including adjacent areas, is $15.4 billion for Corpus Christi and $37.9 billion for Galveston.

If you were one of the thousands of Texas coastal residents that had to file an insurance claim with TWIA following Hurricane Ike, you probably agree with Commissioner Kitzman’s conclusion that TWIA needs a major overhaul. However, change should not come at the expense of removing protections for policyholders. Otherwise, TWIA will have no incentive to act in good faith and we’ll find ourselves in a similar mess next time a major Hurricane makes its way through the Texas Gulf Coast. And no one wants to relive that again.

Wildfire Law: Private Property & Public Interests
Date: Friday, March 23, 2012
Time: 8:30 A.M. - 3:00 P.M., reception to follow
Email: TWjournalsymposium@gmail.com
Cost: $50.00, includes breakfast, lunch, and afternoon reception
CLE: 4 hours (approval pending)

The symposium will focus on federal and state law, as well as policy issues regarding wildfires. The symposium will showcase seven presenters spanning the law and policy of seven states, including Texas.

If you are in the industry, it might behoove you to attend given this past summer’s wildfires in Central Texas.

For more information, click here or email TWjournalsymposium@gmail.com. You can register for the symposium here.

Judge Ellison, of the U.S. District Court for the Southern District of Texas, sided with FM Global, granting summary judgment for all of Bender Square’s claims. Regarding Plaintiff’s certificate of insurance argument, the Court concluded that the certificate of insurance did not give Plaintiff any rights under the policy. Proving fatal to Plaintiff’s allegations, the certificate of insurance contained the following language: “THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER OTHER THAN THOSE PROVIDED IN THE POLICY. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY POLICIES DESCRIBED HEREIN.”

Judge Ellison noted that “[i]t is well-established under Texas law that when a certificate of insurance contains language stating that the certificate does not amend, extend, or alter the terms of any insurance policy mentioned in the certificate, the terms of the certificate are subordinate to the terms of the insurance policy.” Judge Ellison continued, “[t]hus, the certificate of insurance will not suffice to create insurance coverage if such coverage is precluded by the terms of the policy.”

If you would like to avoid the result in Bender Square result, I recommend you require your lessees to acquire insurance for the rental property, listing you as either a named insured or an additional insured. Most certificates of insurance contain language similar to the language found in Bender Square’s certificate, so a certificate of insurance alone will probably not be enough to protect you.
 

At the trial level, the court granted summary judgment in favor of AEIC, finding that the Allen Butler breached the insurance policy by denying AEIC an opportunity to participate in the settlement process. Allen Butler subsequently appealed the trial court’s summary judgment order.

On appeal, Allen Butler was issued another unfavorable decision. In Allen Butler Constr. Inc. v. Am. Econ. Ins. Co., No. 07-10-0490 (Tex.App.—Amarillo, Dec. 13, 2011), the Texas Court of Appeals for the Seventh District of Texas affirmed the lower court’s ruling. The Court of Appeals noted that the policy contained an involuntary assumption provision, under which AEIC had absolute discretion to settle any claim or suit and which required DHD to cooperate with AEIC in the settlement of any claim. The Court concluded that DHD breached the policy by failing to give AEIC the opportunity to participate in the settlement negotiations. Furthermore, the Court found the breach to be material and prejudicial to AEIC because, as a result the breach, AEIC received no benefit from the policy provisions it had bargained for in order to limit its liability.

In its decision, the District Court noted that the phrase “necessary suspension of your operations,” contained in the policy’s business interruption provision had been interpreted to cover the risk of a complete cessation of business activities at the covered premises. By contrast, policies that describe “necessary or potential suspension” of business activities have been interpreted to allow coverage for a partial cessation of business. As a result, the Court found that the policyholder’s argument that its policy provided coverage for reduced business operations lacked support in the plain language of the policy.

Interestingly, the Court pointed out that even if it assumed the existence of coverage, H&H failed to present evidence to raise a fact issue that it was unable to meet customer demand for rooms because H&H’s own “listing of occupancy stats,” which was uncontroverted, supported an inference that H&H did in fact have a supply of rooms sufficient to meet demand. For these reasons, the District Court granted summary judgment in favor of the insurer.

For more analysis of the suspension or interruption requirement in hotel/hospitality policies, see Michelle Claverol’s post, Hotels May Find Courts' Interpretation of Business Interruption Coverage Inhospitable.

For tips on avoiding business interruption coverage gaps check out Michelle’s post,
Hotels May Find Courts' Interpretation of Business Interruption Coverage Inhospitable, Part 2.

The article gives tips for trying to reduce your homeowner’s insurance premium. Suggestions include performing routine maintenance on your home to avoid preventable losses, buying a new roof for your home, equipping your home with an alarm system, and taking advantage of renewal discounts. The best piece of advice from the article is to visit yearly with your insurance agent. The agent can fill you in on any legal changes, as well as informing you of discounts that may apply to your policy.

. . .the numbers of storms, droughts and wildfires. These weather and climate-related events have been climbing steadily since 1980, increasing in number, severity (such as average wind intensity) and often in lives lost.

Regarding the tornadoes, Retloff notes that,

[T]he late April tornadoes in Alabama and May twister in Joplin together racked up $6 billion in damage catapulting these events into the top 10 costliest natural catastrophes in U.S. history.

And as my fellow Texans are aware, Texas experienced more than its fair share of disasters in 2011:

Texans have suffered through the worst wildfire year on record, fueled by a persistent drought. Throughout the spring of 2011, more than 3 million acres of west Texas ignited, destroying more than 200 homes and businesses (insured collectively for $50 million). In September, fires near San Antonio destroyed more than 1,600 additional homes (insured for $530 million).

According to the article, insurance companies take climate change very seriously. For much of the industry, global change issues have moved to the front and center of its radar screen. Because the insurance industry is closely monitoring climate change and its impact on natural disasters, I advise you do the same and to learn how your area might be affected. 

The federal National Oceanic and Atmospheric Administration (“NOAA”) announced that the U.S. was the site of 12 separate disasters, each of which caused at least $1 billion in aggregate damage in 2011. The previous record, set in 2008, was nine.

With all of these new records, you would think that the private insurance industry would be in a lot of trouble. Not so. According to the I.I.I., policyholders’ surplus –insurers’ net worth measured according to Statutory Accounting Principles – fell only four percent to $538.6 billion as of September 30, 2011, compared to $559.2 billion at year-end 2010. You read that right. Even though the insurance industry experienced one of its worst years ever, their net worth dropped by a mere 4%.

For more information, including a list of the 12 separate billion dollar disasters click here.

The Houston Chronicle also reported that:

Policyholders with Allstate Fire and Casualty could face an increase of an average 9.8 percent. Allstate and its subsidiaries provide insurance coverage for about 585,000 Texas homeowners.

The higher rates would take effect Jan. 26, 2012, for current customers, subject to regulatory review over the next 30 days. New customers will pay more beginning this week.

In other news, the Huffington Post published an amazing article detailing the insurance industry’s strategy of purposefully delaying insurance payments. The article points out that the delay many of you have experienced in receiving your insurance payments may not have been accidental. Instead, the article explains how the insurance industry embraced the practice of delaying payments after McKinsey & Company – the world’s largest consulting company – recommended to Allstate to employ such a strategy. Once Allstate’s competitors realized how much money Allstate was making off of its delay tactics, many others followed suit.

I hope you find the articles in this post informative and beneficial. Have a Happy New Year and see you in 2012!